1.the itunes u're using now is not compatible with ur ipod, u may need download a suitable edition for ur ipod from apple official website;
2.there may be some vices about connector plugs of ur ipod,replace it and have a try again.

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I KNOW WATCH U FIRST PRESS THE OFF BUTON AND LET IT TURN OFF THEN PRESS THE HOME BUTTON LET IT PRESSED THEN U PRESS THE OFF BUTOON AND TILL THE ITUNE LOGO WITH THE USB U LET GO BUT UR IPOD HAS TO BE CONNECTED TO ITUNES

you will have to restore your ipod to factory default settings in itunes.
or you can jailbreak the ipod with software like quickpwn.

Here is how to restore your ipod in itunes.
You will need to put the itouch in DFU/Recovery mode to get it to connect.

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Plug the
usb cable into the Ipod and NOT into the computer.Hold the
Home Button down for 5 second (do not release it)Then
Press and hold the Power Button for approx 10 secs (count them out)Your iPod
will reboot.Release
the power button and continue holding the Home button for an additional 27secs.You may
see the screen go blank or not.Plug the
USB end into the computer with itunes open.Your ipod
will mount in recovery mode.Restore
it and Your all set.

1) Open iTunes
2) Connect your iPod Touch
3) Hold down the Home and Wake/Sleep buttom for about 20-30 seconds
4) Then it will say " Connect to iTunes" Disconnect your iPod and Connect it again
5) Then it will say "your ipod is in restore mode" some like that and click OK and click restore
in iTunes and it will download the new version and that's it.

Thanks to everyone who provided solution inputs. I finally have my iPod back. The solution is: 1. Turn of your iPod. 2. While holding down the 'Home' button, connect to iTunes WARNING: Doing this will return your iPod back to original 'out of the box' settings and you will lose everything. On the bright side, you get a 'fresh' start and it will auto update to the most recent software version. Good luck!